**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-QSB**





**xQUARTERLY
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED: September 30, 2007**





**oTRANSITION
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




For
      the
      transition period from _________ to ___________





***Commission
      file number 000-27465***








**INNOVATIVE
      SOFTWARE**


**TECHNOLOGIES,
      INC.**


(Exact
      name of small business issuer as specified in its charter)









**California**
            
            **95-4691878**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**911
                Ranch Road 620 N., Suite 204**
              **Austin,
                TX 78734**
              (Address
                of principal executive offices)





**(512)
      266-2000**


(Registrant’s
      Telephone Number, Including Area Code)







Securities
                Registered Pursuant to Section 12(b) of the Act: NoneSecurities
                Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001
                par
                Value





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter time
      period that the registrant was required to file such reports), and (2) has
      been
      subject to such filing requirements for past 90 days.





YES
x NO
o





Indicate
      by check mark whether the registrant is a shell company (as defined in rule
      12b-2 of the Exchange Act):





YES o NO
x





**State
      the number of shares outstanding of each of the issuer's classes of common
      equity as of the latest practicable date: As of November 14, 2007, the
      registrant had 97,602,885 shares of common stock, par value $0.001,
      outstanding.**





Transitional
      Small Business Issuer Disclosure Format: YES o NO ý








**Index**




Page
              Number**PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheet as of September 30, 2007 (unaudited)
            
            4Consolidated
                Statements of Operations for the three monthsEnded
                September 30, 2007 and 2006 and for the period from
                inception(January
                12, 2005) through September 30, 2007 (unaudited)
            
            5Consolidated
                Statements of Cash Flows for the three monthsEnded
                September 30, 2007 and 2006 and for the period from
                inception(January
                12, 2005) through September 30, 2007 (unaudited)
            
            6Notes
                to Consolidated Financial Statements (unaudited)
            
            7Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation
            
            16Item
                3.
            Controls
                and Procedures
            
            19PART
                II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            20Item
                3.
            Defaults
                Upon Senior Securities
            
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            20Item
                5.
            Other
                Information
            
            21Item
                6.
            Exhibits
            
            21**SIGNATURES**




2


INTRODUCTORY
      NOTE





This
      Report on Form 10-QSB for Innovative Software Technologies, Inc., (the
“Company”) may contain forward-looking statements. You can identify these
      statements by forward-looking words such as “may,” “will,” “expect,” “intend,”
“anticipate,” “believe,” “estimate,” and “continue” or similar words.
      Forward-looking statements include information concerning possible or assumed
      future business success or financial results. You should read statements that
      contain these words carefully because they discuss future expectations and
      plans, which contain projections of future results of operations or financial
      condition or state other forward-looking information. We believe that it is
      important to communicate future expectations to investors. However, there may
      be
      events in the future that we are not able to accurately predict or control.
      Accordingly, we do not undertake any obligation to update any forward-looking
      statements for any reason, even if new information becomes available or other
      events occur in the future.





The
      forward-looking statements included herein are based on current expectations
      that involve a number of risks and uncertainties set forth under “Risk Factors”
in this report and in our Form 10-KSB and any other periodic reports filed
      with
      the SEC. Accordingly, to the extent that this Quarterly Report contains
      forward-looking statements regarding the financial condition, operating results,
      business prospects or any other aspect of the Company, please be advised that
      the Company’s actual financial condition, operating results and business
      performance may differ materially from that projected or estimated by the
      Company in forward-looking statements.




3


**PART
      I - FINANCIAL INFORMATION**




**Item
      1.**  **Financial
      Statements**


**INNOVATIVE
                  SOFTWARE TECHNOLOGIES, INC.****CONSOLIDATED
                  BALANCE SHEET****(A
                  DEVELOPMENT STAGE COMPANY)****as
                  of September 30, 2007****(UNAUDITED)****ASSETS**
 **CURRENT
                ASSETS**Cash
              
              $
              127,118Accounts
                  receivable
              
              
              3,345Inventory
              
              
              3,362Prepaid
                  expenses and other current assets
              
              
              9,340**Total
                  current assets**
              
              
              143,165Property
                  and equipment, net
              
              
              153,979Deferred
                  financing costs
              
              
              103,256Deposits
              
              
              15,700Total
                  assets
              
              $
              416,100**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIT****CURRENT
                  LIABILITIES**Accounts
                  payable and accrued expenses
              
              $
              796,611Accrued
                  officer salary and expenses
              
              
              60,500Customer
                  deposits
              
              
              110,554Deferred
                  gain on sale of fixed assets
              
              
              7,975Current
                  portion of capital lease obligation
              
              
              51,927Convertible
                  notes and debentures
              
              
              934,971Derivative
                  financial instruments
              
              
              1,652,617**Total
                  current liabilities**
              
              
              3,615,155Capital
                  lease obligation, less current portion
              
              
              23,182**Total
                  liabilities**
              
              
              3,638,337**STOCKHOLDERS’
                  DEFICIT**Preferred
                  stock, 25,000,000 shares authorized, no par valueSeries
                  A, 1,500,000 shares authorized, 450,000 shares outstanding
              
              
              450,000Common
                  stock - authorized, 300,000,000 shares of $0.001 parvalue;
                  issued and outstanding, 81,184,496 shares
              
              
              81,184Additional
                  paid-in capital
              
              
              208,620Deficit
                  accumulated during the development stage
              
              
              (3,962,041
              )**Total
                  stockholders' deficit**
              
              
              (3,222,237
              )**Total
                  liabilities and stockholders' deficit**
              
              $
              416,100




See
      accompanying notes to financial statements




4


**INNOVATIVE
                  SOFTWARE TECHNOLOGIES, INC.****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  STATEMENTS OF EARNINGS****(UNAUDITED)**
  **For
                  the Three
                  Months** **Ended September
                  30,**
              
              **For
                  the Six Months **Ended****
                ****September
                  30,****
              
              **From
                  Inception**
                  **(January
                    12, 2005) Through**
                    **September
                      30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **2007****REVENUE**High
                  availability
              
              $
              35,900
              
              $
              35,100
              
              $
              67,545
              
              $
              35,100
              
              $
              184,363Business
                  continuity
              
              
              3,180
              
              
              1,995
              
              
              3,675
              
              
              3,567
              
              
              11,432**Total
                  Revenue**
              
              
              39,080
              
              
              37,095
              
              
              71,220
              
              
              38,667
              
              
              195,795**COST
                  OF REVENUE**High
                  availability
              
              
              11,311
              
              
              22,338
              
              
              33,023
              
              
              33,197
              
              
              118,779Business
                  continuity
              
              
              6,884
              
              
              1,267
              
              
              6,884
              
              
              3,368
              
              
              6,884**Total
                  cost of revenue, excluding depreciation below**
              
              
              18,195
              
              
              23,605
              
              
              39,907
              
              
              36,565
              
              
              125,663**GROSS
                  PROFIT**
              
              
              20,885
              
              
              13,490
              
              
              31,313
              
              
              2,102
              
              
              70,132**OPERATING
                  EXPENSES**General
                  and administrative
              
              
              188,780
              
              
              1,095,318
              
              
              517,165
              
              
              1,235,504
              
              
              2,945,282Commissions
                  and other selling expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,500Depreciation
                  and amortization
              
              
              31,309
              
              
              13,353
              
              
              33,424
              
              
              19,230
              
              
              79,266**Total
                  operating expenses**
              
              
              220,089
              
              
              1,108,671
              
              
              550,589
              
              
              1,254,734
              
              
              3,037,048**LOSS
                  FROM OPERATIONS**
              
              
              (199,204
              )
              
              (1,095,180
              )
              
              (519,276
              )
              
              (1,252,632
              )
              
              (2,966,917
              )**OTHER
                  INCOME (EXPENSE) NET**Change
                  in fair value of derivative liabilities
              
              
              (349,244
              )
              
              (10,623
              )
              
              270,919
              
              
              (10,579
              )
              
              169,241Interest
                  expense
              
              
              (62,814
              )
              
              (209,715
              )
              
              (308,691
              )
              
              (209,715
              )
              
              (1,225,723
              )Interest
                  income
              
              
              322
              
              
              2,724
              
              
              2,585
              
              
              44
              
              
              7,747Other
                  income
              
              
              5,463
              
              
              43,685
              
              
              3,673
              
              
              8,980
              
              
              53,610**OTHER
                  INCOME (EXPENSE) NET**
              
              
              (406,273
              )
              
              (173,929
              )
              
              (31,514
              )
              
              (211,270
              )
              
              (995,125
              )**LOSS
                  BEFORE INCOME TAXES**
              
              
              (605,477
              )
              
              (1,269,110
              )
              
              (550,790
              )
              
              (1,463,902
              )
              
              (3,962,041
              )**INCOME
                  TAXES**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -**NET
                  LOSS**
              
              $
              (605,477
              )
              $
              (1,269,110
              )
              $
              (550,790
              )
              $
              (1,463,902
              )
              $
              (3,962,041
              )**UNDECLARED
                  PREFERRED****STOCK
                  DIVIDENDS**
              
              
              (4,500
              )
              
              -
              
              
              (9,000
              )
              
              -
              
              
              (22,500
              )**LOSS
                  APPLICABLE****TO
                  COMMON STOCKHOLDERS**
              
              $
              (609,977
              )
              $
              (1,269,110
              )
              $
              (559,790
              )
              $
              (1,463,902
              )
              $
              (3,984,541
              )**BASIC
                  AND DILUTED****LOSS
                  PER COMMON SHARE**
              
              $
              (0.01
              )
              $
              (0.02
              )
              $
              (0.01
              )
              $
              (0.02
              )**WEIGHTED
                  AVERAGE NUMBER OF****COMMON
                  SHARES USED IN****BASIC
                  PER SHARE CALCULATION**
              
              
              76,973,527
              
              
              71,950,397
              
              
              75,126,586
              
              
              64,646,805




See
      accompanying notes to financial statements.




5


**INNOVATIVE
                SOFTWARE TECHNOLOGIES, INC.****(A
                DEVELOPMENT STAGE COMPANY)****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)**




**For
                  the Six Months**
                **Ended
                  September 30,**
              
              **From
                  Inception**
                **(January
                  12, 2005)**
                **Through
                  September 30,****2007**
              
              **2006***
              
              **2007****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (550,790
              )
              $
              (1,463,902
              )
              $
              (3,962,041
              )Adjustments
                  to reconcile net (loss) to net cash flows from operating
                  activitiesDepreciation
                  and amortization
              
              
              33,424
              
              
              19,230
              
              
              79,266Common
                  stock and stock option based compensation
              
              
              -
              
              
              748,484
              
              
              655,883Notes
                  payable issued for expenses paid by affiliates and third
                  parties
              
              
              -
              
              
              -
              
              
              258,605Amortization
                  of deferred gain on sale of assets
              
              
              (2,658
              )
              
              
              
              
              (2,658
              )Services
                  paid in common stock
              
              
              29,727
              
              
              -
              
              
              126,559Amortization
                  of convertible debt discount
              
              
              157,097
              
              
              169,635
              
              
              893,452Change
                  in fair value of derivative liabilities
              
              
              (270,919
              )
              
              10,579
              
              
              (169,241
              )Amortization
                  of deferred financing costs
              
              
              24,966
              
              
              37,400
              
              
              120,943Net
                  change in operating assets and liabilities:Accounts
                  receivable
              
              
              5,650
              
              
              (17,265
              )
              
              (3,345
              )Inventory
              
              
              (3,362
              )
              
              -
              
              
              (3,362
              )Prepaid
                  expenses and other current assets
              
              
              (2,195
              )
              
              (6,326
              )
              
              1,460Deposits
              
              
              19,557
              
              
              16,850
              
              
              (14,700
              )Accounts
                  payable and accrued expenses
              
              
              64,076
              
              
              (42,584
              )
              
              40,580Customer
                  deposits
              
              
              110,554
              
              
              -
              
              
              110,554**Net
                  cash flows from operating activities**
              
              
              (384,873
              )
              
              (527,899
              )
              
              (1,868,045
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of fixed assets
              
              
              (33,058
              )
              
              (139,731
              )
              
              (206,385
              )Fixed
                  assets exchanged for lease payments
              
              
              2,490
              
              
              -
              
              
              2,490Cash
                  acquired in the reverse acquisition of Innovative
              
              
              -
              
              
              51,148
              
              
              51,149**Net
                  cash flows from investing activities**
              
              
              (30,568
              )
              
              (88,583
              )
              
              (152,746
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Proceeds
                  from sale lease-back of property and equipment
              
              
              -
              
              
              -
              
              
              125,000Increase
                  in deferred financing costs
              
              
              -
              
              
              -
              
              
              (156,200
              )Proceeds
                  from notes payable
              
              
              -
              
              
              372,114
              
              
              427,969Repayments
                  of notes payable
              
              
              -
              
              
              -
              
              
              (30,000
              )Principal
                  payments under capital lease
              
              
              (15,917
              )
              
              -
              
              
              (21,188
              )Proceeds
                  from convertible debt
              
              
              17,828
              
              
              275,000
              
              
              1,681,328Common
                  stock issued for cash
              
              
              100,000
              
              
              -
              
              
              121,000**Net
                  cash flows from financing activities**
              
              
              101,911
              
              
              647,114
              
              
              2,147,909**Net
                  increase (decrease) in cash**
              
              
              (313,530
              )
              
              30,632
              
              
              127,118**Cash
                  at beginning of period**
              
              
              440,648
              
              
              6,270
              
              
              -**Cash
                  at end of period**
              
              $
              127,118
              
              $
              36,902
              
              $
              127,118**SUPPLEMENTAL
                  CASH FLOW INFORMATION****Non
                  cash investing and financing activities**Issuance
                  of common stock to retire notes payable - affiliate
              
              $
              -
              
              $
              22,337
              
              $
              22,337Issuance
                  of common stock for acquisition
              
              $
              -
              
              $
              -
              
              $
              440,000Assets
                  acquired under capital lease
              
              $
              -
              
              $
              -
              
              $
              136,512Fixed
                  assets exchanged for lease paymentIssuance
                  of common stock for debt repayment
              
              $
              283,633
              
              $
              -
              
              $
              458,748Convertible
                  debt issued for financing costs
              
              $
              44,000
              
              $
              -
              
              $
              88,000Cash
                  paid for interest
              
              $
              17,050
              
              $
              -
              
              $
              34,100Cash
                  paid for taxes
              
              $
              -
              
              $
              -
              
              $
              17,050
 
 *
                  Reclassified to conform to the 2007 presentation. Certain items
                  have been
                  reclassified to conform to the current presentation.




See
      accompanying notes to financial statements.





6




**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**UNAUDITED
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(1)**
              **Basis
                  of Presentation and
                  Reporting**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance accounting principles generally accepted in the United States (GAAP)
      for interim financial information and with the instructions to Form 10-QSB
      and
      Regulation S-B. Accordingly, they do not contain all of the information and
      footnotes required by GAAP for complete consolidated financial statements.
      In
      the opinion of management, the accompanying unaudited condensed consolidated
      financial statements reflect all adjustments (consisting only of normal
      recurring adjustments) considered necessary for a fair presentation of the
      Company’s financial condition as of September 30, 2007, and the results of its
      operations for the six months ended September 30, 2007, and September 30, 2006,
      and the cash flows for the six months ended September 30, 2007, and September
      30, 2006. These unaudited condensed consolidated financial statements should
      be
      read in conjunction with the Company's audited 2007 consolidated financial
      statements, including the notes thereto, and the other information set forth
      therein, included in the Company's Annual Report on Form 10-KSB for the year
      ended March 31, 2007. Operating results for the three-month period ended
      September 30, 2007, are not necessarily indicative of the operating results
      that
      may be expected for the year ending March 31, 2008.




On
      June
      26, 2006, Innovative Software Technologies, Inc., a California corporation
      (“Innovative”), completed the acquisition of AcXess, Inc., a Florida corporation
      (“AcXess”), in a stock exchange transaction. As a result of the Transaction,
      AcXess became a wholly owned subsidiary of Innovative.




The
      accompanying unaudited consolidated financial statements present the accounts
      of
      Innovative and its wholly owned subsidiaries, AcXess, Inc., and EPMG, Inc.
      (collectively, the “Company”). All intercompany balances and significant
      transactions have been eliminated.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. However, the Company has incurred a loss
      of
      $3,962,041 from inception (January 12, 2005) through September 30, 2007, and
      has
      a working capital deficiency and stockholder deficit of $3,368,734 and
      $3,222,237, respectively, at September 30, 2007. The Company currently has
      minimal revenue generating operations and expects to incur substantial operating
      expenses in order to expand its business. The Company expects to incur operating
      losses for the foreseeable future. The Company is in default on its convertible
      notes and through September 30 and incurred liquidated damages of approximately
      $62,000 in connection with its convertible debentures (see Note 6). The
      accompanying financial statements do not include any adjustments that might
      become necessary should the Company be unable to continue as a going
      concern.




Management
      intends to continue to finance operations through fundraising activities as
      well
      as to seek potential acquisitions that have positive cash flows; however, there
      can be no assurance of successful fundraising or acquisition activity in the
      future.




**(2)**
            **Summary
                of Significant Accounting Policies**




***(a)***  ***Loss
      per Common Share***




The
      Company calculates net income (loss) per share as required by Statement of
      Financial Accounting Standards (SFAS) 128, "Earnings per Share." Basic earnings
      (loss) per share is calculated by dividing net income (loss) by the weighted
      average number of common shares outstanding for the period. Diluted earnings
      (loss) per share is calculated by dividing net income (loss) by the weighted
      average number of common shares and dilutive common stock equivalents
      outstanding during periods when anti-dilutive common stock equivalents are
      not
      considered in the computation.




Basic
      loss per share is based on the weighted effect of common shares issued and
      outstanding, and is calculated by dividing net loss by the weighted average
      shares outstanding during the period. Diluted loss per share is calculated
      by
      dividing net loss by the weighted average number of common shares used in the
      basic loss per share calculation plus the number of common shares that would
      be
      issued assuming exercise or conversion of all potentially dilutive common shares
      outstanding.




7




**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**UNAUDITED
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(2)**
            **Summary
                of Significant Accounting Policies
                (continued)**




***(a)***  ***Loss
      per Common Share (continued)***




Shown
      below are the incremental common shares attributable to the exercise of
      outstanding options and warrants that were excluded from the computation of
      diluted loss per share because the effect would be antidilutive.




2007
            
            2006Warrants
                and stock options
            
            
            34,180,205
            
            
            11,678,349




** **(b)**  **Customer
      Concentration**




During
      the six months ended September 30, 2007 and 2006, two customers accounted for
      approximately 92% and 82% of revenues, respectively. The loss of these customers
      would have a material adverse effect on financial results.




***(c)***  ***Deferred
      Financing Costs***




The
      Company capitalizes financing costs as incurred and amortizes these costs to
      interest expense over the life of the underlying instruments.




**(3)**
            **Common
                Stock**




On
      June
      5, 2007, the Company issued 459,778 shares of its common stock with a fair
      market value of $22,989 for legal expenses. On July 27, 2007, the Company issued
      336,862 shares of its common stock with a fair market value of $6,737 for legal
      expenses. The shares of stock issued in the above transactions were valued
      at
      the closing market price on the date of issue .




On
      August
      9, 2007, the Company sold 2,000,000 shares of its common stock to an accredited
      investor at a price of $0.05 per share. The Company also issued a warrant to
      the
      investor to purchase 2,000,000 shares of its common stock at an exercise price
      of $0.05 per share. The warrant has an expiration of 2 years from the date
      of
      issue.




On
      August
      23, 2007, the Company issued an aggregate of 5,672,655 shares of common stock
      in
      exchange for the conversion of convertible promissory notes and accrued interest
      therein in the aggregate amount of $283,633, based on a conversion price of
      $0.05 per share.




**(4)**
            **Commitments,
                Concentrations and Contingencies**




*(a)
      Leases:*




In
      February 2007 the Company entered into a $500,000 Master Lease Line for
      Equipment Purchases (the “Master Lease Agreement”). At that time, the Company
      sold property and equipment for $125,000 and leased them back under the Master
      Lease Agreement. The Company recognized a gain on the sale of those assets
      of
      $10,633 which was deferred and will be recognized over the 24 month term of
      the
      lease.




The
      Master Lease Agreement calls for draws of a minimum of $100,000, a minimum
      term
      of 18 months and a maximum term of 36 monthsThe lease entered into in February
      2007 has monthly payments of $6,363. The Company accounted for this lease as
      a
      capital lease.




In
      connection with the Master Lease Agreement, the Company agreed to issue five
      year warrants to the lender to purchase 1,350,000 shares of the Company’s common
      stock at an exercise price of $0.18 per share. Ten percent (135,000) of the
      warrants vested upon execution of the Master Lease Agreement. The remaining
      90%
      of the warrants vest as on a pro rata basis as the lender provides funding
      under
      the Master Lease Agreement. As such 303,750 warrants vested upon execution
      of
      the sale lease-back described above. The total number of warrants, 438,750,
      was
      valued using the Black-Scholes method and applied to the capital lease
      obligation in accordance with Accounting Principles Board (“APB”) No. 14. This
      resulted in a decrease in capital lease obligation of $37,726 and a
      corresponding increase in additional paid-in capital.




Rent
      expense under all operating leases for the six month periods ended September
      30,
      2007, and 2006, was $21,243 and $25,310 respectively. As of July 1, 2007, our
      principal executive offices are located at 911 Ranch Road 620 North, Austin,
      Texas 78734. This office consists of approximately 340 square feet which we
      rent
      for $900 per month. The term of the lease is month to month with a 60 day notice
      period.




8


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**(4)**
            **Commitments,
                Concentrations and Contingencies
                (continued)**




*(b) Litigation:*




*Kansas
      City Explorers*




The
      Company is a defendant in a lawsuit in the Circuit Court of Platte County,
      Missouri, “Kansas City Explorers vs. Innovative Software” Case no. 04CV82050 in
      which the claimant is seeking money for advertising which it alleges is still
      due, and have alleged damages of $50,028. The claimant has been court ordered
      to
      produce answers to certain discovery requests of the Company which they have
      failed to produce. Management intends to aggressively defend the claim based
      upon the lack of contract between the parties, lack of proof of damages, as
      well
      as minimal proof of advertising services actually performed for Company products
      and services, and other legal and equitable defenses. The Company has not
      accrued any amount for the contingency.




*Bernard
      F. Mathaisel*




On
      June
      14, 2007 the Company was served with a complaint from Bernard F. Mathaisel
      for
      breach of contract relating to an alleged consulting agreement with the Company
      and breach of contract alleging failure to repay a Note due him in the principal
      amount of $55,000. On October 11, 2007, Mr. Mathaisel and the Company executed
      a
      mutual release and the complaint was dismissed on October 25, 2007 following
      the
      purchase of the Mathaisel note by another investor.




**(5)**
            **Convertible
                Notes and Derivative
                Liabilities**




*Derivative
      Financial Instruments*




The
      Company does not use derivative instruments to hedge exposures to cash flow,
      market, or foreign currency risks.




The
      Company reviews the terms of convertible debt and equity instruments issued
      to
      determine whether there are embedded derivative instruments, including the
      embedded conversion option, that are required to be bifurcated and accounted
      for
      separately as a derivative financial instrument. In circumstances where the
      convertible instrument contains more than one embedded derivative instrument,
      including the conversion option, that is required to be bifurcated, the
      bifurcated derivative instruments are accounted for as a single, compound
      derivative instrument. Also, in connection with the sale of convertible debt
      and
      equity instruments, the Company may issue freestanding options or warrants
      that
      may, depending on their terms, be accounted for as derivative instrument
      liabilities, rather than as equity. The Company may also issue options or
      warrants to non-employees in connection with consulting or other services they
      provide.




Certain
      instruments, including convertible debt and equity instruments and the
      freestanding options and warrants issued in connection with those convertible
      instruments, may be subject to registration rights agreements, which impose
      penalties for failure to register the underlying common stock by a defined
      date.
      If the convertible debt or equity instruments are not considered to be
      "conventional", then the existence of the potential cash penalties under the
      related registration rights agreement requires that the embedded conversion
      option be accounted for as a derivative instrument liability. Similarly, the
      potential cash penalties under the related registration rights agreement may
      require us to account for the freestanding options and warrants as derivative
      instrument liabilities, rather than as equity. In addition, when the ability
      to
      physical or net-share settle the conversion option or the exercise of the
      freestanding options or warrants is deemed to be not within the control of
      the
      Company, the embedded conversion option or freestanding options or warrants
      may
      be required to be accounted for as a derivative instrument
      liability.




Derivative
      financial instruments are initially measured at their fair value. For derivative
      financial instruments that are accounted for as liabilities, the derivative
      instrument is initially recorded at its fair value and is then re-valued at
      each
      reporting date, with changes in the fair value reported as charges or credits
      to
      income. For option-based derivative financial instruments, the Company uses
      the
      Black-Scholes option pricing model to value the derivative
      instruments.




When
      freestanding options or warrants are issued in connection with the issuance
      of
      convertible debt or equity instruments and will be accounted for as derivative
      instrument liabilities (rather than as equity), the total proceeds received
      are
      first allocated to the fair value of those freestanding instruments. When the
      freestanding options or warrants are to be accounted for as equity instruments,
      the proceeds are allocated between the convertible instrument and those
      derivative equity instruments, based on their relative fair values. When the
      convertible debt or equity instruments contain embedded derivative instruments
      that are to be bifurcated and accounted for as liabilities, the total proceeds
      allocated to the convertible host instruments are first allocated to the fair
      value of all the bifurcated derivative instruments. The remaining proceeds,
      if
      any, are then allocated to the convertible instruments themselves, usually
      resulting in those instruments being recorded at a discount from their face
      amount.




9




**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(5)**
            **Convertible
                Notes and Derivative Liabilities
                (continued)**




*Derivative
      Financial Instruments (continued)*




To
      the
      extent that the fair values of the freestanding and/or bifurcated derivative
      instrument liabilities exceed the total proceeds received, an immediate charge
      to income is recognized, in order to initially record the derivative instrument
      liabilities at their fair value.




The
      discount from the face value of the convertible debt, together with the stated
      interest on the instrument, is amortized over the life of the instrument through
      periodic charges to income, usually using the effective interest method. When
      the instrument is convertible preferred stock, the dividends payable are
      recognized as they accrue and, together with the periodic amortization of the
      discount, are charged directly to retained earnings.




The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed periodically,
      including at the end of each reporting period. If re-classification is required,
      the fair value of the derivative instrument, as of the determination date,
      is
      re-classified. Any previous charges or credits to income for changes in the
      fair
      value of the derivative instrument are not reversed. Derivative instrument
      liabilities are classified in the balance sheet as current or non-current based
      on whether or not net-cash settlement of the derivative instrument could be
      required within twelve months of the balance sheet date. As of September 30,
      2007 $1,652,617 of derivative financial instruments have been classified as
      current liabilities.




In
      January 2006 the Board of Directors of the Company approved the raising of
      up to
      $1,000,000 via the issuance of promissory notes (the “Notes”) to accredited
      investors. These notes have a term of six months, an interest rate of 12% per
      annum, and are convertible into shares of common stock of the Company at a
      30%
      discount to a future Qualified Financing (as therein described). In addition,
      each of the Notes is issued with warrants to purchase Company common stock
      at a
      strike price of $0.05 per share. The number of warrants granted is determined
      by
      multiplying the face value of each note issued by four. In October the Board
      of
      Directors of the Company approved an increase in the amount to be raised under
      this financing to $1,500,000. A total of $1,107,500 had been raised as of
      November 10, 2006, when the Company closed the round. As of September 30, 2007,
      the Company was in default on all Notes totaling a principal amount of
      $1,107,500. In the event of a default resulting from the Company's non-payment
      of principal or interest when due, a holder of the Notes may declare all unpaid
      principal and accrued interest due and payable immediately. The Company was
      served a complaint from one investor demanding repayment of $55,000 under one
      of
      the Notes (see Note 4). No notice has been received from any other holder of
      the
      Notes and the Company is currently in the process of renegotiating the terms
      of
      the Notes; however there can be no assurance that such negotiations will be
      successful.




On
      December 22, 2006, the Company entered into a securities purchase agreement
      with
      an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible
      Debentures (the “Debentures”). In connection with the Agreement, the Investor
      received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term
      Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares
      of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The
      Long Term Warrants and the Short Term Warrants are exercisable for a period
      four
      years from the date of issuance and the earlier of (i) December 22, 2007 and
      (ii) the date a registration statement(s) covering the resale of all Registrable
      Securities (as defined in the Registration Rights Agreement) is declared
      effective by the SEC (the “Initial Exercise Date”) and on or prior to the close
      of business on the four month anniversary of the Initial Exercise Date,
      respectively. The Company incurred approximately $62,000 in interest expense
      relating to the Debentures due to the “Liquidating Damages” clause specified in
      the Purchase Agreement as a registration statement covering the Registrable
      Securities was declared effective by the SEC on June 25, 2007, 93 days after
      the
      agreed upon date in the Purchase Agreement, March 23, 2007.




The
      default on the Notes discussed above is an “Event of Default” in accordance with
      the terms of the Debenture and, therefore, the Debenture holder may declare
      all
      principal and interest due and payable immediately; however, the Company has
      received no notice from the Debenture holder demanding such
      repayment.




The
      Debentures bear interest at 4% until June 22, 2007 and 9% thereafter, payable
      in
      arrears and mature three years from the date of issuance. Accrued interest
      is
      payable in cash semi-annually, beginning on July 1, 2007. The Company has not
      made the interest payment of $21,271 due on July 1, 2007 and intends to
      negotiate a settlement with the Debenture holder; however there can be no
      assurance that such negotiation will be successful.




10


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**(5)**
            **Convertible
                Notes and Derivative Liabilities
                (continued)**




*Derivative
      Financial Instruments (continued)*




Warrants
      have been accounted for as derivative instrument liabilities (see below) in
      accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
      Indexed To, and Potentially Settled In, a Company's Own Common Stock" (“EITF
      00-19”). Accordingly, the initial fair values of the warrants, amounting to an
      aggregate of $82,239 relating to the issuance of the Notes, and $964,286
      relating to the issuance of the Debentures, were recorded as a derivative
      instrument liability. The fair value of the warrants was determined using the
      Black-Scholes valuation model, based on the market price of the common stock
      on
      the dates the warrants were issued, an expected dividend yield of 0%, a
      risk-free interest rate based on constant maturity rates published by the U.S.
      Federal Reserve, applicable to the life of the warrants, expected volatility
      of
      114% (based on analysis of historical stock prices of the Company and its
      selected peers), and the five year and four year life of the warrants relating
      to the Notes and Debentures, respectively. The Company is required to re-measure
      the fair value of the warrants at each reporting period.




Because
      the conversion price of the Notes is not fixed, they are not “conventional
      convertible debt” as that term is used in EITF 00-19. Accordingly, the Company
      is required to bifurcate and account separately for the embedded conversion
      options, together with any other derivative instruments embedded in the Notes.
      The Debentures are a hybrid instrument that embodies several derivative
      features. The instrument is not afforded the “conventional” convertible
      exemption because of certain full-ratchet anti-dilution protections afforded
      the
      investors. Further, certain derivative features did not meet the conditions
      for
      equity classification set forth in EITF 00-19. As a result, the Company has
      combined all embedded derivatives into one compound derivative financial
      instrument for financial accounting and reporting.




The
      freestanding warrants issued with the Debentures are also hybrid instruments
      that embody derivative features. While bifurcation of the embedded derivatives
      was not required, the warrants did not otherwise meet all of the conditions
      for
      equity classification set forth in EITF 00-19. As a result, the Company has
      recorded the warrants as derivative liabilities at fair value.




The
      conversion option related to each of the Notes was bifurcated from the Note
      and
      accounted for separately as a derivative instrument liability (see below).
      The
      bifurcated embedded derivative instruments, including the embedded conversion
      options which were valued using the Flexible Monte Carlo Simulation methodology,
      were recorded at their initial fair value of an aggregate of
      $801,911.




The
      discount from the face amount of the Notes represented by the value assigned
      to
      the warrants and bifurcated derivative instruments is being amortized over
      the
      period to the due date of each of the Notes, using the effective interest
      method. Amortization related to the Notes for the period ended September 30,
      2007, was $139,622.




On
      August
      23, 2007, the Company issued an aggregate of 5,672,655 shares of common stock
      in
      exchange for the conversion of convertible promissory notes with the principal
      amount of $263,315 and accrued interest of $20,318 totaling $283,633, based
      on a
      conversion price of $0.05 per share. This transaction was exempt from
      registration pursuant to Section 4(2) of the Securities Act of 1933. The balance
      of the notes at September 30, 2007 is $902,722.




The
      conversion option related to the Debentures was bifurcated from the Debentures
      and accounted for separately as a derivative instrument liability (see below).
      The bifurcated embedded derivative instruments, including the embedded
      conversion option which was valued using the Flexible Monte Carlo Simulation
      methodology, was recorded at its initial fair value of an aggregate of
      $553,466.




The
      discount from the face amount of the Debentures represented by the value
      assigned to the warrants and bifurcated derivative instruments is being
      amortized over the period to the due date of the Debentures, using the effective
      interest method. Amortization related to the Debentures for the three months
      and
      six months ended September 30, 2007, was $10,421 and $17,475,
      respectively.




11


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  **(5)**
                **Convertible
                    Notes and Derivative Liabilities
                    (continued)**
  *Derivative
        Financial Instruments (continued)*




A
      summary
      of the Debentures and related derivative instrument liabilities at September
      30,
      2007, is as follows:


Debenture;
                  4% per annum (increasing to 9% per annum in July 2007); due December
                  22,
                  2009
              
              $
              1,000,000Less:
                  unamortized discount related to warrants and bifurcated embedded
                  derivative instruments
              
              
              (967,750
              )Total
                  carrying value at September 30, 2007
              
              $
              32,250




The
      total
      carrying value of the Notes and Debentures at September 30, 2007 was
      $934,971.




The
      Company uses the Black-Scholes valuation model to value the warrants and the
      embedded conversion option components of any bifurcated embedded derivative
      instruments that are recorded as derivative liabilities.




In
      valuing the warrants and the embedded conversion option components of the
      bifurcated embedded derivative instruments, at the time they were issued and
      at
      September 30, 2007, the Company used the market price of our common stock on
      the
      date of valuation, an expected dividend yield of 0% and the remaining period
      to
      the expiration date of the warrants or repayment date of the Notes. All warrants
      and conversion options can be exercised by the holder at any time.




Because
      of the limited historical trading period of the Company’s common stock, the
      expected volatility of the Company’s common stock over the remaining life of the
      conversion options and warrants has been estimated at 114% (based on analysis
      of
      historical stock prices of the Company and its selected peers). The risk-free
      rates of return used were based on constant maturity rates published by the
      U.S.
      Federal Reserve, applicable to the remaining life of the conversion options
      or
      warrants.




At
      September 30, 2007, the following derivative liabilities related to common
      stock
      warrants and embedded derivative instruments were outstanding as a result of
      the
      issuance of the Notes:


**Exercise**
              
              **Value**
              
              **Value****Price
                  Per**
              
              **Issue**
              
              **September
                  30,****Issue
                  Dates**
              
              **Expiry
                  Dates**
              
              
              
              **Share**
              
              **Date**
              
              **2007**May
                  22, through
              
              May
                  22, through
              
              1,600,000October
                  26, 2006
              
              
              October
                  26, 2011
              
              warrants
              
              $
              0.05
              
              $
              82,239
              
              $
              143,831Fair
                  value of freestanding derivative instrument liabilities for
                  warrants
              
              
              
              
              
              
              $
              143,831May
                  22, through
              
              
              May
                  22, throughOctober
                  26, 2006
              
              
              October
                  26, 2011
              
              
              
              
              
              
              
              $
              801,911
              
              $
              849,184Fair
                  value of bifurcated embedded derivative instrumentliabilities
                  associated with the above convertible notes
              
              
              
              
              
              
              $
              849,184Total
                  derivative financial instruments
              
              
              
              
              
              
              
              
              
              $
              993,015




The
      following table reflects the number of common shares into which the
      aforementioned derivatives resulting from the issuance of Notes are indexed
      at
      September 30, 2007:


Embedded
                  derivative instruments
              
              
              35,000,000Freestanding
                  derivatives (warrants)
              
              
              4,430,00039,430,000




12




**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**(5)**
            **Convertible
                Notes and Derivative Liabilities
                (continued)**




*Derivative
      Financial Instruments (continued)*




At
      September 30, 2007, the following derivative liabilities related to common
      stock
      warrants and embedded derivative instruments were outstanding as a result of
      the
      issuance of the Debentures:


**Exercise**
              
              **Value**
              
              **Value****Price
                  Per**
              
              **Issue**
              
              **September
                  30,****Issue
                  Dates**
              
              **Expiry
                  Dates**
              
              
              
              **Share**
              
              **Date**
              
              **2007**December
                  22, 2006
              
              
              October
                  26, 2011
              
              
              10,714,285
                  warrants
              
              $
              0.05
              
              $
              964,286
              
              $
              384,264Fair
                  value of freestanding derivative instrument liabilities for
                  warrants
              
              
              
              
              
              
              $
              384,264December
                  22, 2006
              
              
              December
                  22, 2009
              
              
              
              
              
              
              
              $
              553,466
              
              $
              275,338Fair
                  value of bifurcated embedded derivative instrumentliabilities
                  associated with the above convertible notes
              
              
              
              
              
              
              $
              275,338Total
                  derivative financial instruments
              
              
              
              
              
              
              
              
              
              $
              659,602




The
      following table reflects the number of common shares into which the
      aforementioned derivatives resulting from the issuance of the Debentures are
      indexed at September 30, 2007:


Embedded
                  derivative instruments
              
              
              9,749,041Freestanding
                  derivatives (warrants)
              
              
              12,714,28522,463,326




The
      total
      value of Derivative Financial Instruments at September 30, 2007 was
      $1,652,617.




**(6)**
            **Subsequent
                Events**




On
      July
      24, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”)
      with AcXess, Inc., its wholly owned subsidiary, (“AcXess”), Thomas Elowson,
      President of AcXess, (“Elowson”), Raymond Leitz, Chief Technical Officer of
      AcXess, (“Leitz”), and Helge Solberg, Chief Architect of AcXess, (“Solberg”),
      (collectively, Elowson, Leitz, and Solberg referred to herein as the “Buyers”)
      wherein (i) AcXess redeemed shares of its common stock from the Company in
      return for the issuance of a promissory note to the benefit of the Company
      (the
“Note”) and the signing of a Non-Exclusive License Agreement with the Company,
      (the “License Agreement”) and (ii) the Buyers exchanged stock of the Company
      held by them (the “Stock”) in exchange for stock in AcXess and Elowson canceled
      options for stock in the Company held by him (the “Options”) in exchange for
      stock in AcXess. Immediately following the above redemptions and exchanges,
      the
      Company will continue to own 984,457 shares, or approximately 21.9% of the
      outstanding common stock, of AcXess. The transactions contemplated by the
      Agreement are expected to close upon approval of the transactions by the
      Company’s shareholders. AcXess has 4,500,000 shares of common stock
      outstanding.




The
      Note
      will be in the principal amount of $1,000,000, have a term of two years, and
      bear an interest rate of 10% per annum, interest to accrue until maturity.
      The
      Note is subject to a security agreement (the “Security Agreement”) which
      collateralizes the Note with all assets of AcXess and has an acceleration clause
      for any material default. AcXess will redeem 1,000,000 shares of its common
      stock from the Company with the issuance of the Note.




The
      License Agreement grants the Company a non-exclusive worldwide right and license
      under AcXess’s patents and any improvements relating to business continuity
      software to make, have made, use, sell and otherwise commercialize business
      continuity solutions, with restricted rights on the part of the Company to
      grant
      sublicenses. In addition, the License Agreement grants the Company “Best
      Pricing” on AcXess’ current and future products and services. The License
      Agreement, like the Note, was granted in consideration of the sale by the
      Company to AcXess of 1,500,000 shares of AcXess common stock.




13




**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**UNAUDITED
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(7)**
            **Subsequent
                Events (continued)**




In
      the
      above-described exchange, the Buyers exchanged 4,477,292 shares of common stock
      of the Company for 537,275 shares of common stock of AcXess held by the
      Company.




Elowson
      received 478,268 shares of common stock of AcXess held by the Company in
      exchange for the cancellation of his options to purchase 5,978,349 shares of
      common stock of the Company. These options were fully vested, had an exercise
      price of $0.13 per share and an expiration of August 9, 2016.




On
      October 11, 2007 the Company and Bernard Mathaisel entered into a mutual
      settlement agreement to dismiss a complaint filed by Mr. Mathaisel against
      the
      Company (see Note 4).




Between
      October 12, 2007 and October 18, 2007, the Company issued an aggregate of
      14,633,759 shares of common stock in exchange for the conversion of convertible
      promissory notes and accrued interest therein in the aggregate amount of
      $731,688, based on a conversion price of $0.05 per share.




On
      October 12, 2007, the Company’ Chief Financial Officer accepted an offer from
      the Company to convert $60,500 in accrued expenses and wages into 1,210,000
      shares of the Company’s common stock, based on a conversion price of $0.05 per
      share. The accrued expenses comprised wages and expenses accrued in the 2006
      calendar year.




On
      October 12, 2007, the Company granted Philip D. Ellett, the Company’s Chief
      Executive Officer, and Christopher J. Floyd, the Company’s Chief Financial
      Officer, 21,000,000 options and 7,500,000 options, respectively, to purchase
      shares of common stock of the Company at an exercise price of $0.05 per share.
      The closing price of the Company’s common stock, as quoted on the Pink Sheets on
      October 11, 2007, was $0.03. The options vested according to the following
      schedule: (1) 25% of each person’s options on the date of grant and (2) the
      remaining 75% of each person’s options will vest pro-rata over the 36 months
      thereafter. The options issued to Mr. Ellett and Mr. Floyd have an expiration
      date of October 11, 2017.




On
      October 19, 2007 the Company issued an aggregate of 574,630 shares of common
      stock in exchange for the conversion of a convertible promissory note and
      accrued interest therein in the aggregate amount of $28,732, based on a
      conversion price of $0.05 per share. This transaction was exempt from
      registration pursuant to Section 4(2) of the Securities Act of
      1933.




On
      November 1, 2007, the Board of Directors of the Company approved the dismissal
      of Mayer Hoffman McCann P.C. ("MHM") as independent auditors for the Company
      and
      its subsidiaries. MHM’s reports on the Company's financial statements for the
      prior year did not contain an adverse opinion or disclaimer of opinion, and
      were
      not qualified or modified as to uncertainty, audit scope or accounting
      principles. MHM’s report for the year ended March 31, 2007 was modified to
      include an emphasis regarding uncertainty about our ability to continue as
      a
      going concern. There have been no disagreements with MHM on any matter of
      accounting principles or practices, financial statement disclosure or auditing
      scope or procedure, which disagreements, if not resolved to the satisfaction
      of
      MHM, would have caused it to make reference to the subject matter of the
      disagreement in connection with its report.




On
      November 1, 2007, the Board of Directors approved the Company's engagement
      of
      PMB Helin Donovan, LLP ("Helin") as independent auditors for the Company and
      its
      subsidiaries. The Company engaged Helin on November 1, 2007.




On
      October 1, 2007, Innovative Software Technologies, Inc. (the “Company”) entered
      into a Share Purchase Agreement (the “Agreement”) to purchase all of the
      outstanding shares of Xalles Limited, an Irish corporation (“Xalles”). The
      Agreement was entered into among the Company, Xalles, and Meridian Bay Limited,
      a Hong Kong corporation and the owner of 100% of the stock of Xalles (“Seller”).
      Under the Agreement Xalles will become a wholly owned subsidiary of the Company
      at the time of the closing of the transaction (the “Closing”). At Closing, the
      Agreement calls for the delivery of 20 million shares of the Company’s common
      stock to Seller in exchange for all the issued and outstanding shares of Xalles.
      In addition, the Agreement provides for the issuance of additional shares to
      Seller based on the future net
      income before tax of Xalles (“NIBT”) as follows: 20 million shares issuable
      based on Xalles NIBT of at least $1,000,000 for the 2008 calendar year, and
      20
      million shares issuable based on Xalles NIBT of at least $1,600,000 for the
      2009
      calendar year.




14


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(7)**
            **Subsequent
                Events (continued)**




The
      Closing of this transaction is subject to certain conditions, including the
      completion of the reincorporation merger of the Company through which the
      Company will no longer be a California corporation and will become a Delaware
      corporation (“Redomicile”). The Redomicile was approved by a majority of the
      Company’s shareholder’s on August 24, 2007, as previously reported on the
      Preliminary Information Statement on Schedule 14C filed filed with the SEC
      on
      28, 2007. Timing of the Closing is expected to be within 90 days of the filing
      of the Form 8-K.




The
      offers and sale of the Company common stock to Seller pursuant to the Agreement
      is being made pursuant to the exemption from registration provided by Section
      4(2) of the Securities Act of 1933, as amended. Such offer and sale is being
      made without any form of general solicitation and with full access to any
      information requested by the Seller regarding the Company or the Company common
      stock offered pursuant to the Agreement.




15


**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operations**




*The
      information presented in this section should be read in conjunction with our
      audited financial statements and related notes for the periods ended March
      31,
      2007 and 2006 included in our Form 10-KSB, filed July 19,2007, as well as the
      information contained in the financial statements, including the notes thereto,
      appearing elsewhere in this report.* *This
      discussion contains forward-looking statements reflecting our current
      expectations that involve risks and uncertainties. Actual results and the timing
      of events may differ materially from those contained in these forward-looking
      statements due to a number of factors, including those discussed in the section
      entitled “Risk Factors” and elsewhere in this report.*





*The
      following discussion includes statements that are forward looking in nature.
      The
      accuracy of such statements depends on a variety of factors that may affect
      the
      business and operations of the Company. Certain of these factors are discussed
      under “Business - Factors Influencing Future Results and Accuracy of
      Forward-Looking Statements” included in Part 1 of this report. When used in this
      discussion, the words “expect(s)”, “feel(s)”, “believe(s)”, “will”, “may”,
“anticipate(s)” and similar expressions are intended to identify forward-looking
      statements. Such statements are subject to certain risks and uncertainties,
      and
      actual results could differ materially from those projected. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      and
      are urged to carefully review and consider the various disclosures elsewhere
      in
      this Form 10-QSB.*




**Overview**




The
      following discussion summarizes information about our accounting policies and
      practices and information about our operations in a comparative manner for
      the
      six months ended September 30, 2007, and 2006. Our management’s discussion and
      analysis of financial condition and results of operations should be read in
      conjunction with our consolidated financial statements and related notes thereto
      included elsewhere herein.




**Acquisition
      of AcXess, Inc.**




On
      June
      26, 2006, the Company completed the acquisition of AcXess, Inc., a Florida
      corporation (“AcXess”), in a stock exchange transaction (the “Transaction”)
      pursuant to a Stock Exchange Agreement by and between Innovative, AcXess, the
      Shareholders of AcXess, and Anthony F. Zalenski, acting as the Shareholder’s
      Agent (the “Exchange Agreement”). As a result of the Transaction, AcXess became
      a wholly owned subsidiary of the Company. Following FAS 141, as governing and
      operating control of the combined entity was under Mr. Zalenski, AcXess is
      deemed to be the purchaser in the Transaction for financial reporting purposes.
      Therefore, reverse acquisition accounting applies whereby AcXess is deemed
      to
      have issued its common stock for the net assets or liabilities of Innovative
      accompanied by a recapitalization of AcXess. For accounting purposes, AcXess
      is
      treated as the continuing reporting entity.





AcXess
      was formed to provide Business Continuity (“BC”) products and services to the
      Small and Medium Enterprise (“SME”) market. “Business Continuity” products and
      services are an advanced form of disaster recovery solutions for electronic
      data
      backup wherein the data and/or applications are available upon failure through
      means of connectivity to remote server locations. Management believes that
      the
      North American SME market for BC services (defined as companies with 50 to
      5,000
      employees) is underserved and that various technologies have matured to a point
      where the SME market can now be supplied robust BC services, which were
      previously only available to large corporations and at substantial
      cost.




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of our financial condition and results of operations
      are
      based upon the Company's consolidated financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      us to make estimates and judgments that affect the reported amounts of assets
      and liabilities, revenues and expenses, and related disclosure of contingent
      assets and liabilities at the date of the Company's financial statements. Actual
      results may differ from these estimates under different assumptions or
      conditions.





Critical
      accounting policies are defined as those that are reflective of significant
      judgments and uncertainties, and potentially result in materially different
      results under different assumptions and conditions. The Company’s critical
      accounting policies are discussed in its annual report on Form 10-KSB for the
      year ended March 31, 2007.




16




**Results
      of Operations**




***Three
      months ended September 30, 2007, compared to the three months ended September
      30, 2006.***




Revenues




Revenues
      for the three months ended September 30, 2007, and 2006 were $39,080 and
      $37,095, respectively. Revenues derived primarily from our High Availability
      product line.




Cost
      of Sales and Margins




Cost
      of
      sales for the three months ended September 30, 2007, and 2006 were $18,195
      and
      $23,605, respectively. The decrease in the cost of sales over the two periods
      is
      primarily due to the termination of our Boca collocation agreement which was
      primarily used for initial project setup purposes and which is no longer needed.
      Our gross margins increased to approximately 46% from 36% for the three months
      ended September 30, 2007 and 2006, respectively, due primarily to the reduction
      in network costs from the termination of the Boca collocation
      agreement.




Operating
      Expenses




General
      and administrative expenses for the three months ended September 30, 2007,
      and
      2006 were $220,089 and $1,108,671, respectively. General and administrative
      expenses consisted primarily of salaries and wages, professional fees, rent,
      travel expenses, payroll taxes, telephone expenses and other general and
      administrative expenses. The decrease in general and administrative expenses
      is
      due primarily to the decrease in number of employees and therefore in salaries
      and decreased marketing and travel expenses.




Other
      Loss




Other
      loss, for the three months ended September 30, 2007, and 2006 was $406,273
      and
      $173,929, respectively. Other income for the period ended September 30, 2007
      comprise primarily of derivative and interest income offset by interest expense
      and other expense (see Note 5 in the Notes to the Financial Statements). The
      decrease in the fair value of the derivatives was 349,244 and 10,623 for the
      three months ended September 30, 2007 and 2006, respectively. Interest expense
      was 62,814 and 209,715 for the three months ended September 30, 2007 and 2006,
      respectively. Interest expense for the three months ended September 30, 2006
      was
      due primarily to the amortization of debt discounts and deferred financing
      costs
      relating to the issuance of convertible notes which discounts and deferred
      financing costs have been fully amortized in the present period.




Net
      Loss




Our
      net
      loss for the three months ended September 30, 2007, amounted to $605,477, and
      resulted from a loss from operations of $199,204 primarily due to decreased
      general and administrative expenses. Our net loss for the three months ended
      September 30, 2006 was $1,269,110 and resulted from a loss from operations
      of
      $1,095,180 primarily due to the general and administrative
      expenses.




***Six
      months ended September 30, 2007, compared to the six months ended September
      30,
      2006.***




Revenues




Revenues
      for the six months ended September 30, 2007, and 2006 were $71,220 and $38,667,
      respectively. Revenues derived primarily from our High Availability product
      line.




Cost
      of Sales and Margins




Cost
      of
      sales for the six months ended September 30, 2007, and 2006 were $39,907 and
      $36,566, respectively. Our gross margins increased to approximately 44% from
      5%
      for the six months ended September 30, 2007 and 2006, respectively, due
      primarily to the startup nature of the business in 2006.




Operating
      Expenses




General
      and administrative expenses for the six months ended September 30, 2007, and
      2006 were $550,589 and $1,254,734, respectively. General and administrative
      expenses consisted primarily of salaries and wages, professional fees, rent,
      travel expenses, payroll taxes, telephone expenses and other general and
      administrative expenses. The decrease in general and administrative expenses
      is
      due primarily to the decrease in number of employees and therefore in salaries
      and decreased marketing and travel expenses.




17




Other
      Loss




Other
      loss, for the six months ended September 30, 2007, and 2006 was $31,514 and
      $211,270, respectively. Other income for the period ended September 30, 2007
      comprise primarily of derivative and interest income offset by interest expense
      and other expense (see Note 5 in the Notes to the Financial Statements). The
      increase in the fair value of derivatives for the six months ended September
      30,
      2007 was 270,919, and a loss of 10,579 for the six months ended September 30,
      2006. Interest expense was 308,691 and 209,715 for the six months ended
      September 30, 2007 and 2006, respectively. Interest expense for the periods
      comprised primarily the amortization of debt discounts relating to convertible
      note issuances as well as the amortization of deferred financing
      costs.




Net
      Loss




Our
      net
      loss for the six months ended September 30, 2007, amounted to $550,790, and
      resulted from a loss from operations of $519,276. Our net loss for the six
      months ended September 30, 2006 was $1,463,902 and resulted from a loss from
      operations of $1,252,632.




**Liquidity
      and Capital Resources**




The
      September 30, 2007, financial statements have been prepared assuming the Company
      will continue as a going concern. However, the Company has incurred a loss
      of
      $3,962,041 from inception (January 12, 2005) through September 30, 2007, and
      has
      a working capital deficiency and stockholder deficit of $3,368,734 and
      $3,222,237, respectively, at September 30, 2007. The Company currently has
      minimal revenue generating operations and expects to incur substantial operating
      expenses in order to expand its business. As a result, the Company expects
      to
      incur operating losses for the foreseeable future. In addition, the Company
      is
      in default on two convertible notes in the aggregate principal amount of
      $155,000. The accompanying financial statements do not include any adjustments
      that might become necessary should the Company be unable to continue as a going
      concern.




Management
      intends to continue to finance operations through fundraising activities as
      well
      as to seek potential acquisitions that have positive cash flows; however there
      can be no assurance of successful fundraising or acquisition activity in the
      future.




In
      January 2006, our Board of Directors approved the raising of up to $1,000,000
      via the issuance of promissory notes to accredited investors. These notes have
      a
      term of six months, are convertible into shares of our common stock at a 30%
      discount to a future Qualified Financing (as therein described), and have 20%
      warrant coverage at a strike price of $0.05 and an expiration of 5 years from
      the date of issuance. In October our board of directors approved an increase
      in
      the limit of funding under these terms to $1,500,000. A total of $1,107,500
      had
      been raised as of November 10, 2006, when the Company closed the
      round.




On
      December 22, 2006, the Company entered into a securities purchase agreement
      with
      an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible
      Debentures (the “Debentures”). In connection with the Agreement, the Investor
      received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term
      Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares
      of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The
      Long Term Warrants and the Short Term Warrants are exercisable for a period
      four
      years from the date of issuance and the earlier of (i) December 22, 2007 and
      (ii) the date a registration statement(s) covering the resale of all Registrable
      Securities (as defined in the Registration Rights Agreement) is declared
      effective by the SEC (the “Initial Exercise Date”) and on or prior to the close
      of business on the four month anniversary of the Initial Exercise Date,
      respectively. The Company incurred approximately $62,000 in interest expense
      relating to the Debentures due to the “Liquidating Damages” clause specified in
      the Purchase Agreement as a registration statement covering the Registrable
      Securities was declared effective by the SEC on June 25, 2007, 93 days after
      the
      agreed upon date in the Purchase Agreement, March 23, 2007.




The
      default on the Notes discussed above is an “Event of Default” in accordance with
      the terms of the Debenture and, therefore, the Debenture holder may declare
      all
      principal and interest due and payable immediately; however, the Company has
      received no notice from the Debenture holder demanding such
      repayment.




The
      Debenture bears interest at 4% until June 22, 2007 and 9% thereafter, payable
      in
      arrears, and matures three years from the date of issuance. Accrued interest
      is
      payable in cash semi-annually, beginning on July 1, 2007. The Company has not
      made the interest payment of $21,271 due on July 1, 2007 and intends to
      negotiate an extension with the Investor; however there can be no assurance
      that
      such negotiation will be successful.


18




In
      February 2007, we entered into a master leasing arrangement with Gulf Pointe
      Capital, LLC for equipment purchases up to a total of $500,000 (see Contractual
      Obligations below).




At
      September 30, 2007, we had current liabilities of $3,615,155.




We
      have
      no material commitments for capital expenditures.




**Contractual
      Obligations**




In
      February 2007, the Company entered into a $500,000 Master Lease Line for
      Equipment Purchases (the “Master Lease Agreement”). At that time, the Company
      sold property and equipment for $125,000 and leased them back under the Master
      Lease Agreement. The Company recognized a gain on the sale of those assets
      of
      $10,633, which was deferred and will be recognized over the 24 month term of
      the
      lease.




The
      Master Lease Agreement calls for draws of a minimum of $100,000, a minimum
      term
      of 18 months and a maximum term of 36 months. The leasing factor for each new
      lease under the master lease is as follows; 18 Months - 0.06476, 24 Months
      -
      0.05090, 30 Months - 0.04263, 36 Months - 0.03716. The lease entered into in
      February 2007 has a lease factor of 0.0509 resulting in monthly payments of
      $6,363. The lease entered into in February 2007 has a lease factor of 0.0509
      resulting in monthly payments of $6,363. The Company accounted for this lease
      as
      a capital lease.




In
      connection with the Master Lease Agreement, the Company agreed to issue five
      year warrants to the lender to purchase 1,350,000 shares of the Company’s common
      stock at an exercise price of $0.18 per share. Ten percent (135,000) of the
      warrants vested upon execution of the Master Lease Agreement. The remaining
      90%
      of the warrants vest as on a pro rata basis as the lender provides funding
      under
      the Master Lease Agreement. As such 303,750 warrants vested upon execution
      of
      the sale lease-back described above. The total number of warrants, 438,750,
      was
      valued using the Black-Scholes method and applied to the capital lease
      obligation in accordance with APB 14. This resulted in a decrease in capital
      lease obligation of $37,726 and a corresponding increase in additional paid-in
      capital.




**Item
      3.** **Controls
      and Procedures**





As
      of
      September 30, 2007, we carried out an evaluation, under the supervision and
      with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures. Based on this evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in ensuring that information required to be disclosed by us in our
      periodic reports is recorded, processed, summarized and reported, within the
      time periods specified for each report and that such information is accumulated
      and communicated to our management, including our principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required
      disclosure.




There
      was
      no change in our internal controls over financial reporting that has materially
      affected, or is reasonable likely to materially affect, our internal control
      over financial reporting during the quarter covered by this Report.




19


**PART
      II -** **OTHER
      INFORMATION**





**Item
      1.** **Legal
      Proceedings**





From
      time
      to time, we may become involved in various lawsuits and legal proceedings,
      which
      arise in the ordinary course of business. However, litigation is subject to
      inherent uncertainties, and an adverse result in these or other matters may
      arise from time to time that may harm business. Except as disclosed below we
      are
      currently not aware of any such legal proceedings or claims that will have,
      individually or in the aggregate, a material adverse affect on business,
      financial condition, operating results, or cash flows.




Kansas
      City Explorers




The
      Company is a defendant in a lawsuit in the Circuit Court of Platte County,
      Missouri, “Kansas City Explorers vs. Innovative Software” Case no. 04CV82050 in
      which the claimant is seeking money for advertising which it alleges is still
      due, and have alleged damages of $50,028. The claimant has been court ordered
      to
      produce answers to certain discovery requests of the Company which they have
      failed to produce. Management intends to aggressively defend the claim based
      upon the lack of contract between the parties, lack of proof of damages, as
      well
      as minimal proof of advertising services actually performed for Company products
      and services, and other legal and equitable defenses.




Bernard
      F. Mathaisel




On
      June
      14, 2007 the Company was served with a complaint from Bernard F. Mathaisel
      for
      breach of contract relating to an alleged consulting agreement with the Company
      and breach of contract alleging failure to repay a Note due him in the principal
      amount of $55,000. On October 11, 2007, Mr. Mathaisel and the Company executed
      a
      mutual release and the complaint was dismissed on October 25, 2007 following
      the
      purchase of the Mathaisel note by another investor.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





On
      June
      5, 2007, the Company issued 459,778 shares of its common stock with a fair
      market value of $22,989 for legal expenses. On July 27, 2007, the Company issued
      336,862 shares of its common stock with a fair market value of $6,737 for legal
      expenses. The shares of stock issued in the above transactions were valued
      at
      the closing market price on the date of issue.




On
      August
      9, 2007, the Company sold 2,000,000 shares of its common stock to an accredited
      investor at a price of $0.05 per share. Proceeds will be used for general
      corporate purposes. The shares of stock issued in the following transactions
      were valued at the closing market price on the date of issue.




On
      August
      23, 2007, Innovative Software Technologies, Inc. (the “Company”) issued an
      aggregate of 5,672,655 shares of common stock in exchange for the conversion
      of
      convertible promissory notes and accrued interest therein in the aggregate
      amount of $283,633, based on a conversion price of $0.05 per share.




**Item
      3. Defaults Upon Senior Securities**




As
      of
      November 14, 2007, the Company was in default on two convertible promissory
      notes totaling a principal amount of $155,000 as the term of these notes had
      passed. In the event of a default resulting from the Company's non-payment
      of
      principal or interest when due, the note holder may declare all unpaid principal
      and accrued interest due and payable immediately. The Company has received
      no
      notice from either note holder. On
      August
      23, 2007, one holder converted notes with the principal amount of $263,315
      and
      accrued interest of $20,318 totaling $283,633, for 5,672,655 shares of common
      stock. This transaction was exempt from registration pursuant to Section 4(2)
      of
      the Securities.




Between
      October 12, 2007 and October 18, 2007, the Company issued an aggregate of
      14,633,759 shares of common stock in exchange for the conversion of convertible
      promissory notes and accrued interest therein in the aggregate amount of
      $731,688, based on a conversion price of $0.05 per share. This transaction
      was
      exempt from registration pursuant to Section 4(2) of the
      Securities.




**Item
      4. Submission of Matters to a Vote of Security Holders**




None.




20




**Item
      5. Other Information**





None.




**Item
      6. Exhibits.**




Exhibits
      included or incorporated by reference herein are set forth in the attached
      Exhibit Index.




21


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**Innovative
                Software Technologies, Inc.****Date:**November 19, 2007
            
            /s/
                Philip D. Ellett
              Philip
                D. Ellett
              Chief
                Executive Officer




**Date:**November 19, 2007
            
            /s/ Christopher
                J. Floyd
              Christopher
                J. Floyd
                Chief
                  Financial Officer,
                Vice
                  President of Finance, and
                  Secretary




22




**** **INDEX
      TO EXHIBITS**





**Exhibit**
              **Number**
            
            **Description**31.1
            
            Certification
                of Chief Executive Officer of Innovative Software Technologies, Inc.
                pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange
                Act of
                1934, as amended.31.2
            
            Certification
                of Chief Financial Officer of Innovative Software Technologies, Inc.
                pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange
                Act of
                1934, as amended.32.1
            
            Certification
                of Chief Executive Officer of Innovative Software Technologies, Inc.
                pursuant to 18 U.S.C. 1350.32.2
            
            Certification
                of Chief Financial Officer of Innovative Software Technologies, Inc.
                pursuant to 18 U.S.C. 1350.




23